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WRAPUP 5-Gasoline prices erode U.S. spending, incomes
May 27, 2011 / 4:28 PM / in 6 years

WRAPUP 5-Gasoline prices erode U.S. spending, incomes

 * Consumer spending rises 0.4 percent in April
 * Real spending up 0.1 percent; inflation at 12-month high
 * Pending home sales drop 11.6 percent in April
 * Consumer sentiment rises, inflation expectations ease
 (Updates markets to close)
 By Lucia Mutikani
 WASHINGTON, May 27 (Reuters) - The U.S. economy remained
sluggish early in the second quarter as high gasoline prices
crimped consumer spending and bad weather helped push pending
home sales to a seven-month low in April.
 Consumer spending increased 0.4 percent for a 10th straight
month of gains, the Commerce Department said on Friday, after
rising 0.5 percent in March.
 But prices rose 0.3 percent, leaving spending up just 0.1
percent and incomes stagnant when adjusted for inflation.
 Tornadoes and floods, which lashed parts of the country
last month, were blamed in part for an 11.6 percent plunge in
contracts to buy previously owned homes last month.
 "We see the soft patch of the first quarter bleeding, at
least, into the first half of the second quarter," said Robert
Dye, senior economist at PNC Financial Services in Pittsburgh.
 "We will see again a consumer that can keep pace with the
economy, but cannot drive the economy forward."
 Recent data including retail sales and industrial output
have been soft, prompting economists to lower their growth
forecasts for the second quarter. Further cuts are likely next
week should May auto sales come in very weak.
 Second-quarter gross domestic product forecasts are
currently ranging between a 2.5 percent and 3 percent rate.
 The government reported on Thursday that consumer spending
-- which accounts for about 70 percent of U.S. economic
activity -- grew at a tepid 2.2 percent annual rate in the
first quarter, slowing from a 4 percent clip in the final three
months of 2010.
 That contributed to holding back overall economic growth to
a 1.8 percent pace during the quarter after a 3.1 percent rate
in the October-December period.
 With much of the slowdown attributed to what U.S.
policymakers see as temporary factors, such as high commodity
prices and supply chain disruptions because of the earthquake
in Japan, the Federal Reserve is not expected to worry too much
about the pace of recovery.
 The U.S. central bank is expected to keep its ultra-easy
monetary stance after it wraps up its $600 billion government
bond-buying program in June before it start looking at ways to
withdraw some of the stimulus it has lent the economy.
  INSTANT VIEW - US consumer spending tepid [ID:nN27296561]
  INSTANT VIEW - US pending home sales dive [ID:nN27118030]
  Graphic - personal spending
  Graphic - US pending homes sales vs. existing home sales
  Graphic - University of Michigan consumer senitment
 U.S. financial markets were little moved on the data.
Stocks rose, while government debt prices fell modestly. The
dollar fell against a basket of currencies.
 The high gasoline prices swallowed almost all the increase
in incomes from U.S. tax cuts enacted in December.
 Economists worry that stagnant incomes -- which have failed
to keep up with inflation -- will continue to impede spending
even though prices at the fuel pump are starting to fall.
 So far, consumers have resorted to saving less and some are
tapping into their savings to maintain spending. Incomes rose
0.4 percent last month, but disposable incomes adjusted for
inflation were flat for a second straight month.
 Real incomes have not grown this year and the saving rate
stayed at a 2-1/2 year low of 4.9 percent in April. According
to the Commerce Department's chief economist, Mark Doms,
Americans saved $82 less over the past four months.
 "Consumers have dipped into savings in order to make it
through this challenging environment," said Michael Feroli, an
economist at JPMorgan in New York.
 "Just as consumers used savings to smooth through the
energy price spike on the upside, any move to rebuild saving in
the wake of easing gas prices could soften the lift to what
otherwise should be a very stimulative development."
 The retreating gasoline price helped to lift consumer
spirits this month and dial down their inflation expectations.
 The final version of the Thomson Reuters/University of
Michigan consumer sentiment survey showed sentiment among
Americans rose this month to 74.3 from 72.4 in the preliminary
May reading.
 The survey's one-year inflation outlook fell to 4.1 percent
from 4.4 percent in April, while expectations for the next five
years dipped to 2.9 percent from 3.0 percent.
 The national price for regular unleaded gasoline prices
slipped to $3.90 a gallon in the week through Monday, according
to the Energy Information Administration, after peaking just
above $4 a gallon early in the month.
 This is giving some economists a reason to be optimistic.
 "We are optimistic that the recent easing of gas prices --
if it continues -- will provide a tailwind to consumption in
the coming months," said Joseph LaVorgna, U.S. chief economist
at Deutsche Bank in New York.
 High gasoline prices pushed up the year-on-year inflation
rate to 2.2 percent, the biggest rise in a year, after
increasing 1.8 percent in March.
 Excluding food and energy, prices increased 1 percent, the
largest gain since September, after rising 0.9 percent in
March. Fed officials would like this measure close to 2
 (Editing by Neil Stempleman and Andrew Hay)

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